Learning any new skill, whether it’s playing a musical instrument or completing a course in aeronautical engineering, takes time and commitment. The same philosophy applies when it comes to investing. And, like any endeavour, we all make mistakes along the way. The trick, of course, is to learn from those mistakes – but if you’re just starting out in any form of investing, there are certain principles that hold true throughout.
Here are five key priorities to bear in mind before investing your hard-earned cash.
1. Knowledge is power
Never make an investment based on instinct alone. Every smart investment decision is based on research and empirical evidence in order to minimise risk. When it comes to online trading, for example, there are a growing range of investments from stocks and shares, to FX trading and CFDs. But what makes a trader successful is access to data and information. And that only comes from research.
Of course there are many tools out there that can help you with that research and enable you to acquire the knowledge you need to make good decisions. Trading platform often provide their own tools and resources to offer support. Spread betting platform informed decision about your next investment.
2. Look before you leap
Online trading might look like an easy way to make money – especially if you believe the multitude of online Internet ads telling you so, but that’s not the case at all. It’s not for everyone and the only way you can find out if it’s for you is by trying it. Day trading, in particular, is a risky business and should only ever be attempted by seasoned traders.
Fortunately, you don’t need to spend any cash to learn how to trade. All you need is a free account with any number of online trading platforms out there. Most will allow you to make mock trades, so you can get a feel for what it’s like – and, more importantly, find out if you’re any good at it!
3. Too much, too soon
When you finally get round to knowing enough about trading online to use ‘real’ money, it can be tempting to invest it all on one ‘sure thing’. That would be a mistake. Make sure you spread it around to diversify your investment. Sound investing is all about buying a number of assets selectively over a period of time while keeping a comfortable level of risk. Essentially, this is what makes investing different from gambling. So don’t put all your money on one horse; invest in a controlled manner across a range of asset classes and sectors.
4. Get the taxman on your side
Where amateur investors get it wrong is that they don’t always fully understand the tax implications of their investments. Most profit from investments is subject to taxation, whether due to capital gains (£11,100 is the 2015/16 capital gains allowance) or tax on dividends (minimum 10% at source – although this law is set to change next year with the first £5,000 becoming tax free). However, while all of this can affect your tax return, you can also offset capital losses against your tax liabilities. So if you don’t already have an accountant preparing your tax return, perhaps now’s the time to hire one.
5. The sunk cost fallacy
Stop losses are there for a reason – mostly because of what is known as the ‘sunk cost fallacy’. This is an economics principle based on human nature. A sunk cost is one that has been paid out and cannot be recovered. For example, say you over-order at a restaurant, but keep on eating, as you don’t want the food (or money you’ve spent) to go to waste.
In the same way that people stay in bad relationships because they’ve already invested so much into the partnership, the sunk cost fallacy can be catastrophic when it comes to your relationship with your investments. The stop-loss is there to prevent your losses going beyond a certain point – as it separates your emotional investment from your financial investment. So if you don’t want to end up in a dead-end relationship with your finances, make sure you use it.